Sunday, January 26, 2014

Monopoly is a confusing term which has various meanings and definitions. It is an important concept within economics as well as political philosophy (especially in the libertarian realm).

What is one to think of monopoly? Woods explains.

Those of us who get drawn, often against our better judgment, into Internet debates soon discover that the case against the market economy in the popular mind boils down to a few major claims. Here I intend to dissect one of them: under the unhampered market we’d be at the mercy of vicious monopolists.

This fear can be attributed in part, no doubt, to the cartoon history of the 19th century virtually all of us were exposed to in school. There we learned that rapacious “robber barons” gained overwhelming market share in their industries by means of all sorts of underhanded tricks, and then, once secure in their position, turned around and fleeced the helpless consumer, who had no choice but to pay the high prices that the firms’ “monopoly” position made possible.

This version of events is so deeply embedded in Americans’ brains that it is next to impossible to dislodge it, no matter the avalanche of evidence and argument applied against it.

Historian Burton Folsom made an important distinction, in his book The Myth of the Robber Barons, between political entrepreneurs and market entrepreneurs. The political entrepreneur succeeds by using the implicit violence of government to cripple his competitors and harm consumers. The market entrepreneur, on the other hand, makes his fortune by providing consumers with products they need at prices they can afford, and maintains and expands his market share by remaining innovative and responsive to consumer demand.

It is only the political entrepreneur who deserves our censure, but both types are indiscriminately attacked in the popular caricature that has deformed American public opinion on the subject.

Andrew Carnegie, for instance, almost single-handedly reduced the price of steel rails from $160 per ton in 1875 to $17 per ton nearly a quarter century later. John D. Rockefeller pushed the price of refined petroleum down from more than 30¢ per gallon to 5.9¢ in 1897. Cornelius Vanderbilt, operating earlier in the century, reduced fares on steamboat transit by 90, 95, and even 100 percent. (On trips for which a fare was not charged, Vanderbilt earned his money by selling concessions on board.)

These are benefactors of mankind to be praised, not villains to be condemned.

To be sure, there are caveats, as there always are in history. For a time, Carnegie did support steel tariffs. Since he substantially reduced the price of steel rails, though, this political position of his did not harm the consumer. Other critics will point to the Carnegie and Rockefeller foundations and the dubious causes those institutions have supported. Their objection is irrelevant to the specific question of whether the men themselves, in their capacity as entrepreneurs, improved the American standard of living. That question is not even debatable.

Mainstream economics identifies monopolists by their behavior: they earn premium profits by restricting output and raising prices. Was that behavior evident in the industries where monopoly was most frequently alleged to have existed? Economist Thomas DiLorenzo, in an important article in the International Review of Law and Economics, actually bothered to look. During the 1880s, when real GDP rose 24 percent, output in the industries alleged to have been monopolized for which data were available rose 175 percent in real terms. Prices in those industries, meanwhile, were generally falling, and much faster than the 7 percent decline for the economy as a whole. We’ve already discussed steel rails, which fell from $68 to $32 per ton during the 1880s; we might also note the price of zinc, which fell from $5.51 to $4.40 per pound (a 20 percent decline) and refined sugar, which fell from 9¢ to 7¢ per pound (22 percent). In fact, this pattern held true for all 17 supposedly monopolized industries, with the trivial exceptions of castor oil and matches.

In other words, the story we thought we knew from our history class was a fake.

Wednesday, January 8, 2014

Robert Wenzel blogs at EconomicPolicyJournal.com and has blogged numerous times in the past about “Intellectual Property” or “IP” as it is known shorthand. Earlier this year, I blogged about the debate between Wenzel and Stephan Kinsella. While I generally agree with Wenzel on many things, we do differ on the ethical basis of whether intellectual property is justified and can exist in some type of Stateless or Private Property society through a scheme of contractual agreements.

Robert Wenzel has a blog post with his own critique of Shaffer’s book and arguments. While I will not go into a line-by-line critique of Wenzel’s comments, I did want to share a discussion I had with Wenzel and another commenter, Nick Badalamenti, on this topic.

Most anti-IPers conflate the concept of IP with governments role in it(currently) because they fail to consider that the free market would present solutions over time to difficult issues surrounding IP in general.

Nice write up Wenzel.

I'd only like to add that in perusing Butler's list of creative geniuses the first thought that immediately came to mind without further research is that Shakespeare was able to make a living out of the natural respect for his IP(his writing) at the time(no gov't needed) as well as Mozart having several patrons that respected his IP. The idea that they weren't thinking about money at the time seems a bit of a stretch, but more importantly they were paid for IP as an implicit acknowledgement of such.

IP being a lightning rod topic for discussion, I look forward to reading other comments on the above.

I agree that there is a difference between "IP" as it stands today with regards to Copyright/Patent laws versus adjudication via contracts and property agreements in a Stateless society. But, the entire discussion surrounding IP does beg the question of what is or can be "property" in the normative sense and why is it needed at all in the first place? So, if one wants to think about IP, there are presuppositions that are important and need to be recognized.

The genesis/history of "IP" dates back to things like the Statute of Anne and the Statue of Monopolies which granted monopoly privilege to particular individuals of a certain industry or trade. So, yes the concept of IP is important to the debate since things like copyrights, patents, etc are by definition normative monopoly privileges granted to person or persons by a territorial monopolist (The State).

I'd like to point out that Shakespeare did not make much money by writing/selling his works but mostly through his production company which produced the live plays. This is what made Shakespeare rich and wealthy and not necessarily his "works" per se. Mozart (I believe) was directly financed to compose and produce works for the aristocracy but paid directly for his live performances. In both cases, we see that these artists constantly had to churn out more and more material and not just rely on a monopoly privilege granted through copyright. So, the lack of any type of IP protection (contractual or otherwise) encourages more and more innovation. And, if you produce a home run of a hit (play or otherwise), you’re going to get a lot of attention from investors or consumers to fund your FUTURE works.

As I imagine, artists, authors, musicians, etc would still be able (today) to produce works for those who would seek their services – especially to perform concerts, etc. That (after all) is the way most musical artists make a lot of money especially if they own their own production company and go on various concert tours. Things like crowd-funding, sponsorship, and ad revenue from things like YouTube make it is fairly easy to see how the absence of IP would not (and is not) a hindrance to making money as an artist.

In the modern sense, we see similarities in the food industry where top chefs are sought out for their culinary skills and paid based for the service, labor, consulting. Two of my favorite TV (Reality) shows are Gordon Ramsay's "Kitchen Nightmares" and Robert Irvine's "Restaurant Impossible." Both shows involve brilliant Chefs and entrepreneurs (Ramsay and Irvine) being brought in as Consultants to turn around some type of failing eating establishment. In doing this, they always provide the restaurants with their own personal recipes and yet I do not see any whiff of "protectionism" or erecting onerous contractual agreements of how these restaurants can use the recipes. They WANT these restaurants to say, “hey we sell a Bangers and Mash dish based on Ramsay's recipe.” This enhances the Chef's own brand, reputation, and bona fides.

So, the constant thread I want to highlight is that writers/authors/musicians/chef’s, etc are compensated on the model “Expertise of X as a Service.” Here are some examples. For teachers and professors it is “education as a service.” For authors, it is “knowledge/advice/history as a service.” For musicians/composers/comedians it is “Music & Entertainment as a Service.” For someone like myself, a software developer, I am compensated for my ability to provide “Software as a service”.

So how does this apply to the researcher who has to spend years and someone's capital to create a product that could be instantly copied? Are you making a special anti_IP case for geniuses?

I wasn’t making a case to single out geniuses or researchers, but rather a general and principled case why IP is not necessary, required, or even needed for creative people to monetize their knowledge. It is irrelevant what their vocation/profession or IQ is.

Thanks for the question which I do appreciate is a good one. Let me try and respond since your question is a bit vague. I'm not sure if you're questions pertains to something like pharmaceuticals or something else. So, I'll just use the example of the industry that I'm in - software and technology - which is chalk full of researchers, capitalists, and geniuses like the scenario you’ve posed.

The amount of time it takes to procure, create, invent, or produce something as well as how easily said thing can be replicated, copied, or emulated are obviously two important factors in the decision making/actions of any creator or inventor. As a software developer myself working in a highly competitive software marketplace deal with this all of the time and I've pondered the question of whether I should sell my software services for a wage rate or go out on my own and work for myself as an independent consultant and start my own company. There are pros and cons to both paths. If something is easily copied, emulated, or mimicked, that is going to impact how a company or individual sole proprietor does protect his “secret sauce.” There are all kinds of ways that developers protect their software or issue subscriptions with a certain type of license/key that expire or must be validated in order to properly use them.

But anyway, I have a concrete example that goes directly to your question and I hope answers it succinctly.

Let’s take an example of JavaScript which is probably the best example that I can think of to answer your query. JavaScript is code that runs on the user’s machine and can be viewed by anyone. To see what I’m talking about, right click your browser you are currently using and click “View Source” and you will undoubtedly see what I’m talking about. There are thousands if not millions of developers and researchers out there writing JavaScript code for companies (and making lots of money doing this). Anyone can copy JavaScript code, modify it, and use it for their own purposes. John Resig is a JavaScript developer and “genius” in my book for probably the most influential JavaScript code (or “Library” as it is better known) called “JQuery.” He is the inventor/founder of the JQuery library which is probably running on almost all modern websites today. This is a free library that costs nothing to download, run, install (as are virtually all JavaScript libraries) and yet is extremely valuable in its utility for running software.

John Resig now works for Khan Academy as an application developer and is making who knows what kind of money. The thing is that with John Resig’s creation of JQuery, he is a rock star in the software industry and yet I have no idea how long it took for him to create the JQuery library. And yet, I’m sure he can write his own ticket to work for anyone (Google, Facebook, Yahoo) or do whatever he wants based on this skillset, CV, knowledge, programming ability to continue to provide value (“software as a service”) and not rely on any type of IP protection, royalties, or reoccurring monies from JQuery library.

There are many other John Resig’s out there (brilliant/genius researchers, inventors, technologists) who fit this same criteria (Anders Hejlsberg is another that comes to mind) who earn money based on the value of their specific “service” and not based on any royalties from their so-called IP.

I think one important point you are not addressing is that the chefs you mention, teachers, and yourself are offering "services"(which obviously an important distinction for you as you don't want to connotate the notion that knowledge is property, which I disagree with and is one of the fundamental areas of disagreement in the IP debate in general) in a VOLUNTARY manner, such as information/intellectual sharing.

If you have the knowledge and someone is paying you for it for consultation and you offer up a recipe in their service to make their restaurant better then you have willingly sold some of your "property" in doing so.

The same goes for you on a software level. More specifically though, if you work for a company as a software developer and they've invested time & money into you and you come up with a custom software solution for them then you've both fulfilled the terms of your agreement(contract) and your work(and IP) now becomes theirs.

In most cases, companies contracting with you would have some type of agreement with you in advance that any software developments you create for them would be theirs exclusively and bind you from sharing with others.

If you told an employer or customer for whom you did software work for that any solution they pay you for would then become "communal" or "public" property I highly doubt most would pay you to start, regardless of whether you think what you do is a "service" that isn't potentially property.

I responded to his claims and elaborated on where we might agree and spots where we disagree, especially on the trend of software developers posting code their own code on open-source repositories. I also provided a bit of a critique on the infamous and so-called “Drudge Formula.”

Thank you for the response Nick.

You are correct that stating the “product/good” that is being sold (to an employer or a consumer) IS the "service" procured the individual - the chef, teacher, myself or the Mozart/Shakespeare. This type of "good" that is offered differs from say an apple, car, tv, or microwave. So, I do think there is a difference between a service-based good versus a physical/tangible good. I won’t dive into this whole discussion/tangent since it’s been covered at length before.

If I offer my labor services to someone (as a developer) I've simply exchanged just that - my labor or expertise in exchange for something else (whether I'm remunerated for it or not). Now, we might have some type of contractual agreement we agree to abide by which is completely fine. But, this has no bearing on any other parties (again a topic I won't elaborate on at this time).

Now, when I work for a company as say a W2 employee (not a 1099 contractor), I'm using the company's capital (computers, hardware, facilities, energy, etc) to produce/procure whatever they want. Any competent company is going to take care of the source code I maintain/procure for them and ask me for documentation and the whole bit. They want to make sure all the work I've done is backed up and secure in case I leave or even say if I get hit by a beer truck. I may or may not agree to sign a non-disclosure agreement, non-compete clause, etc while I am employed and this is all fine as well. But, again if I break or violate any of the contractual agreements I vowed to uphold, I am the only person that is liable for damages and would be obligated to pay said damages if I am at fault. This is all consistent with standard contract and tort law and requires zero protection from any type of patents or copyrights or whatever.

And, I have actually told companies I’ve worked for that some code that I write might be reused if/when I leave for another company. Most companies in the software business know how to secure and protect privileged information (algorithms, processes, designs, etc) and many companies haven’t a clue what is valuable and what is not valuable when it comes to software. Most simply care about delivering solutions to their customers and developers who simply add value.

Many developers have agreements (informal or otherwise) with their employers/clients to post on public repositories (like GitHub) their own source code. Again, it is not the code that is necessarily valuable as much as the service the software provides as an end. Many companies open-source a lot of their software like Microsoft open sources a lot of things (see http://www.asp.net/open-source & http://blogs.technet.com/b/ad/archive/2013/12/18/open-sourcing-our-developer-libraries.aspx) and yet spend lots of $$$ on the development for it. Sure there are loss-leader type strategies for this, but I think this example is apropos.

A key thing is that software is always changing and requires constant attention for refinements. So, software rarely stops at "version 1.0" and thus a lot of software comes with tech-support, feature requests, bug fixes, etc - hence the emergence of the "Software as a Service" model.

Lastly, I’ll say one last thing as it relates to Wenzel’s “Drudge Formula” (a means of getting onto the Drudge Report). If such a thing actually exists, the “value” is not the formula/process/algorithm per se. The value of such a thing is the valued end of the “service” Wenzel is offering to drive more traffic, awareness, attention of someone’s article or story to his site. So, the means for doing this is not what matters as much as the value of providing such a service. Maybe he should call it “Syndication as a Service.”

I completely understand the impulse many creative folks have for wanting to protect their creations and ward off competitors or mere opportunists of the so-called “pirate” variety and prevent others from simply copying ad-hoc (whether they be musicians, artists, authors, or writers). Most creative folks instinctively want to protect and safeguard their own intellectual works (code, poems, songs, ideas, algorithms, recipes, designs, etc). As a software developer, if I (working as a sole-proprietor or as an employee for a company) come up with an inventive assembly of logic and software that has the potential to be both profitable and add utility for users/consumers, you can bet the farm I’m going to think of ways secure and protect such an innovation from potential competitors who might want to emulate such a creation.

However, justifying any use of force or compulsion through the use of easements or negative servitude persons against persons and their property (both physical property and their own labor) is a completely different ball of wax.

The important point is to recognize the reproducible nature of the object(s) I create (call it “software” or whatever). Instead of trying to make water run up a hill and attempt to ethically qualify things as “property” when these things are neither scarce, rivalrous, or mutually exclusive, it benefits myself and others to spend my time, energy, and resources understanding the best ways to make that which I produce as unique and non-reproducible as possible as a “service-based” good. Instead of arguing a million different ways to create unrealistic and unjust pseudo-Stateless IP scheme or system based on some mythical copyright-based contractual legal system, creative folks (like myself) are better off cultivating viable business models that are win-win for all parties involved.

Become a Robert Irvine, Gordon Ramsay, or John Resig. Don’t be a Robert Kearns.

[This post has been updated. Note: The opinions expressed on this blog, including this post, are my own and do not necessarily reflect the opinions of my past, present, or future employers.]

About Me

My name is Andy Katherman. I live in Iowa and work as an Application Developer & Consultant. In my spare time, I enjoy learning, reading, and blogging about economics, politics, and ethics. Most of my work is influenced by Austro-libertarian thinkers, St. Thomas Aquinas, and the School of Salamanca. In this tradition, I'm interested in Praxeology, the Non-Aggression Principle, Lockean Homesteading, and Natural Law. All thoughts are my own and do not necessarily reflect the views of my employer.